The Variables in the LSD Market Behind the Decline of frxETH TVL

Recently, as the highest yielding frxETH in the Ethereum liquid staking derivative (LSD), its total locked value (TVL) has unexpectedly decreased by 100,000 ETH over the past 3 months. This article will explore the reasons behind this phenomenon and its impact on the highly competitive ETH staking market.

Introduction to frxETH

frxETH is an Ethereum stablecoin launched by Frax Finance, generated by directly staking ETH. It uses a dual-token design, (frxETH and sfrxETH), which makes sfrxETH the highest-yielding ETH LSD product currently available. Since its launch in November 2022, the yield of sfrxETH has not only surpassed that of stETH by 24% during the same period, but is also 40% higher than that of rETH.

Main Reasons for the Decline in TVL

Despite the obvious yield advantage, the TVL of frxETH has still seen a significant decline. This is mainly due to the impact of the re-staking craze. Platforms like Eigenlayer have attracted a large number of users to participate in re-staking by offering reward points, resulting in funds flowing out of frxETH. Data shows that the time when Eigenlayer opened deposits on February 5 coincided exactly with the time when frxETH's TVL reached its peak.

Arbitrage Balance within the frxETH Ecosystem

Frax Finance provides two yield paths for frxETH users:

1. Deposit frxETH into the Curve frxETH/ETH liquidity pool to earn LP rewards.
2. Re-stake frxETH as sfrxETH to earn additional staking rewards.

These two choices create a dynamic arbitrage balance due to the difference in yield, keeping the yields of both methods at similar levels. As of June 12, the yield of Curve's frxETH/ETH liquidity pool is 2.72%, while the yield of sfrxETH is 3.42%.

Points War in the LSD Market

Point rewards are effective as a temporary incentive during the initial phase of a project, but they are not a sustainable long-term strategy. Users often turn to other projects once their points are exhausted. To address this challenge, Frax Finance plans to directly offer native re-staking services in frxETH v2.

Fraxtal: The new L2 solution from Frax Finance

Frax Finance is developing an L2 network called Fraxtal, which is a modular Rollup blockchain with a "fractal scaling" roadmap. The main features of Fraxtal include:

• EVM Compatibility
• Modular Rollup Architecture
• Block space incentive measures ( Flox )
• Use frxETH as the Gas payment token

New Features of frxETH v2

frxETH v2 will introduce the following new features:

• Decentralized Validator
• Improve node capital efficiency
• Node Operator Performance Incentives

In addition, Fraxtal will use frxETH as Gas fees, and burning frxETH can increase the annual yield of sfrxETH.

In summary, despite the current challenge of declining TVL faced by frxETH, its future development remains promising. Frax Finance is actively developing new features and solutions to enhance the competitiveness of frxETH. With the launch of these new features, frxETH is expected to make a comeback in the Ethereum liquid staking market, becoming an anomaly worth paying attention to.